Political risk is now everyone’s risk – WTW

Political Risk has transformed from a low frequency, high severity peril into “everyone’s risk,” a brief from broker WTW warns.

An unprecedented nine out of ten companies (92%) suffered a political risk loss in 2022, the broker’s data revealed. 

That was up from 35% in 2020, highlighting the role of the war in Ukraine in delivering widespread losses, WTW said.

“Panellists were worried about the escalation of the conflict in Ukraine, but more worried about complications like sanctions and inflation,” said Sam Wilkin, director of political risk analytics at WTW.

The survey and interviews, conducted in January and February by Oxford Analytica, are based on responses received from 50 companies around the globe, half of which had revenues in excess of $1bn.

Some of the survey’s key take-away data are listed below.

• · 86% of Western European respondents reported a net negative financial impact from the Ukraine conflict
• · 33% of North American firms suffered a net negative financial impact
• · 48% of respondents reported a direct political risk loss in one or more BRIC countries
• · 100% of responding companies enhanced their political risk management capabilities since February 2022
• · 68% now purchase political risk insurance, compared to 25% in 2019
• · Nearly 50% predict deglobalization will “greatly strengthen”
• · 42% say decoupling from China will “greatly strengthen”.

One European respondent described the business impact of the Ukraine conflict and its humanitarian consequences as “devastating”.

“We have decided to end all our operations in Russia and Belarus. We suffered a loss of almost $1bn,” said one respondent, working for a US technology firm.

Whatever the financial impact, the shock of war on the European continent had triggered a “paradigm shift,” another respondent said.

“Business and politics have lived in two different realities. The events of the past year have now aligned realities,” said an executive in the automotive sector.

Ukraine heads the list of interview panel members’ top risks for 2023, followed closely by decoupling from China and crisis and new regulations in the EU.

“They’re worried that they could be arrested for facilitating avoidance of sanctions, for example, or that they could be pressured to renegotiate energy contracts next autumn,” said Wilkin.

“At the same time, they have more profound concerns about how globalized business models can be made to work in a politically divided world,” he added.

Panelists struggled to imagine how the US-China economic relationship could be unwound without overwhelming damage to the world economy, WTW observed.

Many companies are becoming nervous about continuing business there but are unsure about how to disconnect from such a major market.

“Every day is China strategy day,” one European automotive sector panelist said.

The WTW report can be downloaded here.